Which stocks will protect you from a FTSE 100 meltdown?

The FTSE 100 has been making new all-time highs this year but one thing we know about markets is that they never rise in a straight line. Sooner or later there’ll be a sharp correction (a temporary fall of 10%-plus) or, less frequently, a bear market — a prolonged fall in excess of 20%.
One way to mitigate the impact of a falling market on your portfolio is to have a good proportion of lower-beta stocks among your holdings. The market’s beta is one and if a stock has a beta of less than that, it’s theoretically less volatile than the…

Keep Reading

Register by giving us your email below to continue reading all of the content on the site. Soon you will also begin to receive our FREE email newsletter, The Motley Fool Collective. It features straightforward advice on what’s really happening with the stock market, direct to your inbox. It’s designed to help you protect and grow your portfolio. (You may unsubscribe any time.)

We will use your email address only to keep you informed about updates to our web site and about other products and services that we think might interest you. The Motley Fool respects your privacy! Please read our Privacy Statement.

The FTSE 100 has been making new all-time highs this year but one thing we know about markets is that they never rise in a straight line. Sooner or later there’ll be a sharp correction (a temporary fall of 10%-plus) or, less frequently, a bear market — a prolonged fall in excess of 20%.

One way to mitigate the impact of a falling market on your portfolio is to have a good proportion of lower-beta stocks among your holdings. The market’s beta is one and if a stock has a beta of less than that, it’s theoretically less volatile than the market. For example, a stock with a beta of 0.75 will swing 25% less than the market.

Other notable companies in the sector, all with betas of 0.6, are Reckitt’s rival Unilever, drinks giant Diageo and tobacco firms British American and Imperial Brands.

During the last great bear market of 2007-09 the FTSE 100 fell by 48% in under 18 months. Reckitt’s shares declined by just 14% over the same period. Investors are willing to pay a premium price for the relative stability of consumer goods giants and Reckitt trades on a forward P/E of 22, with a 2.3% dividend yield. I believe this is a premium worth paying.

Utilities

Regulated utilities also typically have low betas. National Grid(LSE: NG) and water companies Severn Trent and United Utilities all have betas of 0.5. During the 2007-09 bear market, their shares declined 27%, 33% and 36%, respectively, compared with the Footsie’s fall of 48%.

National Grid currently trades on a forward P/E of just over 15, with a juicy prospective yield of 4.6%. The shares are some 15% below their 52-week high and look very buyable to me at this level.

Precious metals

According to the data from Digital Look, the two FTSE 100 companies with the lowest betas are Fresnillo(LSE: FRES) at 0.3 and Randgold Resources at negative 0.3.

If you’ve followed the share prices of precious metals miners at all, you’ll know they can be highly volatile. You may be wondering why they have low betas. The answer is that while a beta below one can indicate a stock with lower volatility than the market, it can, alternatively, indicate a volatile stock but one whose price movements are not highly correlated with the market. At the extreme, a stock with a negative beta is one that tends to go up when the market goes down, and vice versa.

When there’s fear in the equity markets — as we saw in the aftermath of the Brexit vote — the prices of precious metals, and the companies that mine them, typically rise.

As the outlook for the UK isn’t currently anywhere near as dire as was initially feared at the time of the referendum, the shares of Fresnillo and Randgold have retreated from their highs. Fresnillo is 32% off its peak of last year and Randgold 29%. Fresnillo appears marginally more attractive on this basis but they are on similar valuations and I rate both stocks a buy.

Five top blue chips

I've mentioned 10 low-beta stocks in this article, but have any of them made the cut for an elite group of FTSE 100 companies the Motley Fool's experts have identified as 5 Stocks To Retire On?

You can find out which companies have made the grade and why our analysts rate these businesses so highly in this exclusive FREE report.

The report comes with no obligation, simply CLICK HERE for your free copy.

G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Diageo, Imperial Brands, and Reckitt Benckiser. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Looking for a low-cost Share Dealing service?

Our preferred partner, interactive investor, offers all the knowledge, tools and information you need to be a confident investor. Whether you’re looking for an everyday trading account, making the most of your ISA allowance or planning for your retirement, they provide great value for money, through simple, fair and clear charges, so it’s easy to work out what it costs to invest.